South Africa

King Code of Governance Principles

The update to the King Code of Governance Principles and the King Report on Governance (“King IV”) has come into effect for financial years beginning on or after 1 April 2017. King IV requires application of all principles on an “apply AND explain” basis. It sets out best practice recommendations to achieve good corporate governance. As in King III, King IV recommends integrated sustainability performance and integrated reports to assist investors in assessing true economic value.

King IV includes several sector supplements including one for state-owned entities and another for small and medium enterprises. The sector supplement for retirement funds supports responsible investment as it requires pension funds to be responsible corporate citizens by taking account of sustainability including ESG factors.

Code for Responsible Investing in South Africa (CRISA)

CRISA, which was launched in 2011, provides institutional investors with guidance on how to undertake investment analysis and activities to promote sound governance. It is similar to the UN-backed Principles of Responsible Investment (PRI). CRISA is voluntary, without a formal signatory mechanism. The principles are adopted on an “apply or explain” basis.

The five CRISA principles are:

An institutional investor should incorporate sustainability considerations, including environmental, social and governance, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.

An institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities.

Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles of CRISA and other codes and standards applicable to institutional investors.

An institutional investor should recognise the circumstances and relationships that hold a potential for conflicts of interest and should proactively manage these when they occur.

Institutional investors should be transparent about the content of their policies, how the policies are implemented and how CRISA is applied to enable stakeholders to make informed assessments.

In 2013, a report commissioned by the CRISA Committee found that while almost 50% of surveyed institutions provided some form of disclosure on their approach to CRISA, there were shortcomings in the application of CRISA, especially in relation to the monitoring and control structures. The report also identified varying practices and degrees of accountability across institutions, which suggests there are challenges in seeing the full implementation of CRISA’s principles.

Regulation 28 of the Pensions Fund Act

“Reg 28” governs the prudential investment guidelines for pension funds based in South Africa. It sets the limits of investment exposure that pension funds might have to different asset classes such as equities or debt as well as offshore allocations. Reg 28 was amended in July 2011 to support SRI as follows:

“A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment.”

The JSE SRI Index aims to promote sustainable and transparent business practices. The SRI Index has undergone several changes since it was launched in 2004. In 2013, the entire FTSE/JSE All Share was assessed automatically on publically available information for the first time with 72 constituents making the grade. This rose to 82 constituents in 2014. In October 2015, the JSE announced a new partnership with FTSE Russell, which will see the FTSE ESG Rating methodology being used. Two new indices were launched: the FTSA/JSE Responsible Investment Index and the FTSE/JSE Responsible Investment Top 30 Index.